Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended June 30, 2017
Business Overview: SFL operates a diversified fleet of 70 vessels and rigs, including tankers, offshore drilling rigs, container ships, car carriers, and dry bulk vessels. The company focuses on long-term charters to reputable operators.
Key Financial Metrics
| Metric | Q2 2017 | Q1 2017 |
|---|---|---|
| Total Charter Revenues (Non-GAAP) | $150 million | $152 million |
| U.S. GAAP Operating Revenues | $94.2 million | $96.9 million |
| Adjusted EBITDA (Non-GAAP) | $118 million | $119 million |
| Net Income | $20.1 million | $32.3 million |
| Earnings Per Share (Basic) | $0.22 | $0.35 |
| Net Cash from Operating Activities | $55.6 million | $45.5 million |
| Liquidity (Cash + Revolving Credit) | $278 million | N/A |
| Fixed Rate Charter Backlog | $3.4 billion | N/A |
Note: U.S. GAAP revenues exclude $8.7 million classified as repayment of investment in finance leases and $47 million from assets classified as 'investment in associate'.
Material Changes vs. Prior Period
- Dividend Reduction: The quarterly dividend was reduced to $0.35 per share from the previous level, citing the pending financial restructuring of Seadrill and a softer tanker market.
- Net Income Decline: Net income decreased to $20.1 million from $32.3 million in Q1 2017, primarily due to a $5.7 million negative impact from mark-to-market valuation of hedging instruments and non-cash amortization.
- Asset Sales: The company sold two crude oil tankers (Front Brabant and Front Scilla) for net proceeds of approximately $39 million, recording a book loss of $2.7 million. An additional tanker (Front Ardenne) was agreed to be sold in Q3.
- Fleet Renewal: Two new LR2 product tankers were delivered in August 2017 on long-term charters to Phillips 66, replacing older assets.
- Offshore Operations: The drilling rig Soehanah commenced operations in Asia. Three rigs remain chartered to Seadrill affiliates, contributing approximately $14.6 million net of interest and debt amortization.
Guidance, Outlook, and Risks
- Seadrill Restructuring: Seadrill, a major charterer for three of SFL's drilling rigs, is in advanced discussions regarding a recapitalization likely involving Chapter 11 proceedings. SFL is engaged in talks to find a sustainable long-term arrangement. Seadrill has continued to perform on obligations to date.
- Market Conditions: The crude oil tanker market remains soft, with average daily rates for Suezmax tankers declining to $26,900 in Q2. Dry bulk spot rates are also below profit share thresholds.
- Strategy: Management maintains a conservative profile, focusing on long-term charters. They anticipate opportunities for growth due to low asset prices and a challenging banking environment for competitors.
- Financing: Successfully placed NOK 500 million ($60 million) in senior unsecured bonds in June 2017. Secured $76 million in long-term bank financing for new LR2 tankers.
Investor Verification Checklist
- Verify the status of Seadrill's restructuring and its potential impact on the charter payments for the three rigs (West Hercules, West Taurus, West Linus).
- Confirm the execution of the sale of the Front Ardenne tanker and the expected book gain in Q3 2017.
- Monitor the performance of the two new LR2 product tankers and their integration into the Phillips 66 charter.
- Review the impact of the $5.7 million mark-to-market loss on hedging instruments on future quarters.
- Assess the sustainability of the $0.35 dividend given the adjusted EBITDA and cash flow generation.